Say what you mean and mean what you say: Socially Responsible Investment in Europe

Sep 2006
San Francisco, USA , September, 29 2006 - As Europeans headed for their long-awaited summer holidays, bankers had good reason to celebrate. The annual return across the board has been exceptionally favorable. For green and ethical fund managers it has been a bumper year. As of June 2005, there were 375 “socially responsible” funds available to investors in Europe, 6 % more than the year before, and this year promises similar growth in funds using ethical, social and environmental criterion for portfolio development. From the second quarter of 2004 to the same period in 2005, managed “ethical” assets grew 27%, from 19 billion to 24 billion mid term 2005. The U.K. leads the ethical banking community in Europe. 33.2% of the SRI funds offered to the public are registered there. France is considered the strongest growth market based upon the value of assets under management and a 20% growth rate in the number of funds offered for the second consecutive year. Sweden and Italy make up another 10% of the market for SRI products.

Not surprisingly, five of the ten largest funds in terms of assets managed are British, led by Friends Provident Pensions Ltd.´s Stewardship Pension Fund, but Italy’s Pioneer Obbligazionario Euro Corporate Etico Fund is ranked number two and Austria’s ESPA Bond Euro Mündelrent takes the number four position in the 2005 ethical banking review released by Sustainable Investment Research International (SIRI). The top performing funds in 2005, however, were managed by Sarasin Investfonds AG (Switzerland) and Sarasin Expertise AM in France.

Equity funds heavily outweigh fixed asset and balanced funds across the board and the equities most frequently chosen by fund portfolio managers of the largest SRI funds in Europe are names well known on both sides of the Atlantic. Telecommunications (Vodafone, Ericsson and Telefonica), pharmaceuticals (GlaxoSmithKline and Pfizer among others) and the petroleum giants (BP and Royal Dutch Petroleum) are top picks, side by side with other, mostly European, banks.

These holdings may sound a lot like banking business as usual, but the inclusion of these companies in SRI funds reflects the intention of major European SRI experts to work from the inside out, influencing corporate behavior simultaneously as clients, consultants, educators, stakeholders and industry watchdogs. SRI in Europe is as much a part of the social movement’s toolbox as it is a corporate business policy. The social movement is diverse, progressive and multi-disciplinary and its players are as at home on the board of an NGO as they are on a government advisory committee. An example of a successful European SRI professional is Andreas Kraemer, whose decision to leave the petrochemical sector to study environmental engineering and sciences in Berlin and Paris enabled him to square his personal ethics with an impressive multi-faceted career track. Managing director of the policy institute EcoLogic since its founding in 1995, Kraemer is also co-chairman of the advisory boards of ÖkoWorld, a group of green investment funds and mutual trusts, a member of the Board of the Bellagio Forum for Sustainable Development, advisor to the Dutch government and a visiting professor at the Duke University Berlin campus on European integration and environmental policy.

Whereas the largest SRI funds in Europe, such as top ten analyzed in the SIRI report offer high returns (as high as 48.8 % in the case of top ranked Sarasin last year), smaller ethical banks maintain lower risk, lower return portfolios of funds that offer individual investors a mechanism for changing the way the world does business, and perhaps, a better night’s sleep.

The investment policy of smaller European ethical banks is to concentrate on micro and mid-size sustainable and social enterprises and fair trade and establish a loyal customer base that not only accepts, but also demands, strict adherence to a wide variety of screening considerations. The British Co-operative Bank makes a point of publishing the high volume of trade that it has refused during the past year, ten million pounds sterling, for ethical reasons. The potential clients rejected, whom the Co-operative Bank declines to identify by name, include other, much larger, banks, for reasons ranging from environmental concerns to prejudice against homosexuals.

Triodos Bank, an ethical bank that grew out of a 1968 Dutch study group and now operates in The Netherlands, U.K., Belgium, Spain and Germany, has been 100% carbon neutral since the year 2000 and has recently thrown down the environmental gauntlet to its larger colleagues in the industry. Triodos CEO Peter Blom asserts that his bank’s success lies in its commitment to action, rather than words and has called upon other banks to follow the Triodos example. “If they do, they’ll demonstrate a real contribution to sustainability. Banks talk a lot about social responsibility but this will help prove they mean it.” Triodos has an excellent track record of putting its money where its mouth is, basing its funds on investments in micro-credit industries and financial operations around the world in projects as diverse as Café Direct in Latin America, ethical banking in Cambodia and carbon neutrality in the U.K.

In Bilbao, Spain, the foundation FIARE (acronym for "Fundación Inversión y Ahorro Responsable) was created in 2003 to promote socially responsible savings and investment among both private individuals and institutions in the Basque Country. With a mission to fight poverty and social exclusion and promote international cooperation, education and theories of social economy, FIARE is still far away from being a bank with a convenient branch office in every neighborhood. It currently operates as a local financial promoter of Banca Popolare Etica, Italy. By December 2005, it had collected 3 million Euros in savings and does not expect to reach the volume of operations necessary to establish itself as a Co-operative Bank until 2010, but FIARE never expected to be an overnight success. While Spain presently trails most other nations in SRI investment, FIARE has models in grassroots entities like the UK Co-operative Bank and the Banca Popolare Etica and confidence in its long-term strategy of involving its polyglot stakeholders, that range from educational organizations and NGOs to religious organizations, in its vision of an alternative, more inclusive, kinder and gentler financial community.

Although dwarfed by the big players in financial services, smaller banks such as Triodos and The Co-op bank have seen consistent growth, Triodos reporting an international earnings per share increase of 41% for 2005. Craig Shannon, the Co-op bank's director of business management has noted, "When we launched our ethical stance back in 1992, its initial appeal was very much to individual customers who wanted to know what happened to their money while it was in the bank. Now, 14 years on, a quarter of the bank's corporate customers join us because we are prepared to turn away certain sorts of business." The bank has recently coordinated operations with the CIS, the group’s insurance venture, under the name Co-op Financial Services in order to more fully develop the market for integrated services within the sprawling Co-operative Group customer base.

Despite the growth in interest in socially, ethically and environmentally screened investments in Europe, these funds currently fall short of composing 2% of funds under professional management here, compared to 10 % in the U.S...* The challenge of transforming SRI from a niche operation into a mainstream activity is the driving force behind Economie, an international organization founded in 2005 by British SRI veteran Brian Harrison Spence. Much of Harrison Spence’s career has been spent in the Independent Financial Advisory sector. In 2004, he sold his highly successful Harrison Spence LLP, to dedicate himself to Economie, whose aim is to train and accredit independent financial advisors who want to specialize in socially responsible investment counseling. Economie has already developed Britain’s first examination syllabus for financial advisers who specialize in socially responsible investment, which is available to all advisers on line. Bournemouth and Birkbeck University moderate the examinations and accreditation through the Certified Insurance Institute is expected soon. Economie has a network of 15 partners worldwide and will hold its first international conference on SRI “Eco6” in Zurich in October 2006.

The gap between the traditional banking titans in Europe and their ethical counterparts remains enormous and thus far, unbridgeable. This is more clearly manifest the further south one travels in Europe. The Spanish Banco Santander Central Hispano, for example, has an ethical fund created specifically for Catholic charity investment that not only screens for child labor and sexual or racial discrimination, but also to eliminate companies that approve of, promote or market, means of birth control or sterilization, effectively limiting its appeal outside of conservative Catholic circles. ESADE, an internationally recognized Spanish business school that offers an MBA in CSR stewardship has publicly expressed its doubt over the future possibility of widespread interest in ethical investing in Spain.

While mainstream institutions cite lack of public interest for their lack of initiative in promoting SRI, the small, co-operative and grassroots ethical banks put up stands in sustainable living, fair trade and organic food fairs throughout Europe to attract new customers one at a time. The near total lack of large institutional interest in SRI has meant an open market for the small cap true believers and an almost zero incidence of “green washing” in the financial services sector. If SRI is not the quick road to riches, neither is it a road mined with scandals and ruined reputations. For the European financial services professional who simply wants to earn a living without compromising his or her personal ethical standards, these are good times indeed.

* 10 % figure taken from the Social Investment Forum 2005 Report on Socially Responsible Investing Trends in the United States


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